"Banks create money out of nothing" - Guardian
- Thread starter Jazzz
- Start date
cesare
shady's dreams ♥
When there's a banking crisis, it goes further than that because you can have the equivalent of a bank run on currencies too. Think Greece, and the Euro. Etc etc etc ... collapse.
It's only been 30 odd years since the Third World Debt banking crisis, and here we are again. Personally, I think it's an unsustainable system in the medium to long term. But no-one's put forward a workable alternative.
So what sank the Lehman Brothers?
love detective
there's no love too small
the run on the bank was a symptom of the deeper problem that northern rock faced - it wasn't the cause of their demise it was an effect of it, which of course compounded the problem, but it didn't create it in the first place
the amount of withdrawls/transfers from customers of northern rock into other banks was around £2 billion - a figure dwarved by the £30 billion odd of funding that it found itself not having and thus unable to fund their ongoing business, hence the state stepping in
although your magpie like ability to only see the shiny surface stuff and ignore the essence of what happens means you will never see this
love detective
there's no love too small
and if they can create cash out of thin air why is it possible for bank's to even make losses in the first place
why do they have to go to the state for money when they can just conjure it up
how can a bank run out of something it can create from nothing out of thin air
why do interbank & wholesale lending markets exist if bank's can just create the money they need out of nothing
why can a bank get into a position where it cannot settle its liabilities when those liabilities are just invented in the first place, they don't really exist apparently
why would the state lend a bank £30bn in emergency funding so that it could meet its liabilities/obligations when those liabilities apparently aren't real and were just invented
why do bank's bother lending in the first place if they can just magic the money out of nothing - surely be much easier to just magic your money out of thin air than going to all that trouble of lending & borrowing
and finally, if according to jazz the accounting entries are the reality - this surely means that it is impossible for a bank's financial statements to not reflect reality. Why then are hundreds of millions of pounds spent each year by banks auditing their financial statements to ensure they reflect reality. Why do bank's continually have to retrospectively restate their accounts to correct them. If they are reality then surely it would be impossible for a bank's financial statements to not reflect reality, because they are reality - so there can be no disconnect according to Jazz. So even if a dog was made chief accountant in a bank and hammered all manner of nonsense into its ledger with its mucky paws, the accounts wouldn't be wrong, because the accounts are reality
and so on and so on......
love detective
there's no love too small
I trust the irony isn't lost on the boards biggest conspiracy theorist appealing to establishment figures to back up his case. Nor appealing to the fact that the person has received the same 'honour' as Tony Blair, Bono, an extreme neo-liberal south african finance manager, and the bosses of Microsoft & Dell. It's an ironic twist where you fall back on the establishment to erm, tell us what the establisment is hiding from us in your oh so public information threads
At least it's marginally better than citing an article which says the exact opposite of what you're arguing to back up your case
let's have another look at that and contrast the article that you claim backs up your case with what you actually say
The article:-
article said:
Pay attention to the bits in bold - everything above, Jazz, relates to the necessity of circulation for bank's to then play their dependent (not independent) role in the credit creation & money circulation process. i.e. the bank is not the independent actor who can create 'money out of nothing' - they are entirely dependent on the activities of those that they mediate between for this to happen. This is what the article above focuses on.
Contrast the above now, with what you stated here for example
Jazz said:
What you wrote above directly and 100% contradicts what the article above says
Yet you still claim, with a serious face, that the above article supports what you said above
That's as nutty as me pointing to one of your posts to help make my case
love detective
there's no love too small
I've went over this at length countless times on here, so patience wearing a bit thin on typing out lengthy posts on this when it's been done a million times. I've written plenty on this in the past and even on this thread. Don't take this the wrong way, but there seems little sense to just constantly repeat the same thing.
I'm saying that the logical constraints of circulation means that a bank can't magic the conditions necessary for money to circulate and be 'created' from within the bank itself. it is totally dependent on the flows of the circulation process itself outside of the bank's control. This is the 'natural' systemic constraint the restricts what the bank can do. Obviously in boom and bubble times, this fast moving flow and circulation process allows for the rapid expansion of the money supply out of all proportion with it's anchor of value, but eventually value asserts itself and everything gets reined in via crisis.
I've explained countless time that it does - and pointed to the real life empirical examples of what happens when a bank is not able to maintain that funding that it had put in place for the duration of the loans it has made, i.e. northern rock. If you and jazz were correct that bank's didn't need to fund its lending, then northern rock shouldn't have collapsed, but it did (and it's collapse had nothing to do with customers transferring a couple of billion electronically from one bank to another - it was the funding gap of £30bn that opened up when NR was frozen out of the inter bank lending market - i.e. the clue is in the title there, it couldn't get access to the funding it required so it couldn't go on without emergency assistance)
NR raised finance in the wholesale lending market to initially fund the mortgages they made (i.e. it couldn't make that mortgage lending without that funding - something that both you & Jazz suggest can happen, but it can't)
This short term funding was rolled over every 3 months until enough mortgages had been made to parcel them up and securitise them (i.e. sell those packaged assets/loans on to other investors)
At this point the mortgage lending came off NR's books and onto whoever bought the bundled loans
NR received money in exchange for the bundled mortgages which was then used to repay the initial wholesale lending that had funded them, and made that lending possible, in the first place
then the whole process started again
until
they were unable to package up & sell any more bundled mortgages when the crisis hit, which meant that those loans stayed on their books along with the initial wholesale lending that had funded them (so the US sub prime crisis was the impetus that closed up the securitisation route for NR, but it wasn't US sub prime lending that NR itself had actually been doing, it didn't have any of that stuff on its books to any material degree - and it wasn't buying bundled CDO's which then left it with toxic assets on its books, it was selling bundled CDO's to other investors, some of which may have went bad, but on the whole it was nowhere near the toxic state of the US sub prime market, but regardless it made no difference as these loans were now on some other investor's books, not northern rock's)
when those wholesale loans came towards the end of their latest 3 month period, it was clear that the interbank market was not willing to roll them over like they had previously done and like how NR's business model had expected to happen
At that point NR was faced with a £30bn funding gap - which had to be plugged by emergency funding from the state
The above is what happened in reality - Jazz (and to an extent your) hypothetical analysis suggests that in theory the above would not happen as you claim that bank's don't need to fund their lending. When I hold up that theorem to the cold light of reality through subjecting it to empirical reality it falls apart instantly. Jazz's analysis reminds me of the old austrian economists who used to implicitly argue 'if only reality would accord to what we write in our theoretical textbooks then everything would be ok' - i.e. reality was ignored because it got in the way too much of their theory. Not a great basis to go about understanding the world around us. If something doesn't hold up to robust testing against concrete reality, what use is it? Sure you can ignore reality to keep that theory on life support for a bit longer, but surely theories are about helping us to understand what actually happens in the world, not to blind ourselves to what happens in order to preserve discredited theory
Yes, but it was more a systematic retreat in general from bundled mortgages by the type of investors who had previously bought them - i.e. a move away from that kind of product in general, not an aversion to anything coming out of NR in particular - i.e. even bundled mortgages that were top quality at that time were shunned by those who had normally bought them because of the tainted packaging they came in
This is quite true. But yours is the "big picture" underlying reality behind money "creation" , and circulation. ie, No people, hence no economic activity, particularly no constant economic growth, and there can be no non-inflationery increase in the money supply, or use for money of course. But surely this is entirely an "argument" where both sides are sticking to their own distinct definitional framework, so that BOTH statements are essentially "true", depending on how broadly one sets the parameters of the statement. Fractional Reserve banking is obviously in no way creating extra "value" spontaneously from nothing - but its very operation , ie, lending out more than it has received as deposits (as a simplified model) is both a reflection of , and DRIVES, the constant expansion of the capitalist system (its one of them "dialectical relationship" thingies). and as a major benefit to the banks themselves, as a by-product of being able to multiply up the money value of their deposits, in interest-earning loans, the banks make huge superprofits out of the normal functioning of capitalism.
Even if Jazzz has some underlying, possible anti semitic agenda as claimed, which he hasn't displayed here at all , that doesn't mean that his more limited scope, part of the full picture, statement, of "banks create money out of nothing" is "untrue".
Bernie Gunther
Fundamentalist Druid
That's actually really clear and helpful. Thanks.
love detective
there's no love too small
occasionally a clear & helpful post slips through my quality control process - try not to let it happen too often!
love detective
there's no love too small
sounds like quite a useful thing then, if we want to understand the big picture
absolutely
but this is not what happens, it can only lend out slightly less than what it receives in, in deposits. clearly circulation means that money circulates and things loop round and round allowing a substantial increase in the money supply in this way, but this can only be done if deposits are continued to be made, allowing additional lending out (for example if the initial loan was made from a bank and the party who borrowed the money took the money and put it in the mattress, then that money comes out of circulation entirely, it can't be lent on again and again unless if flows back in again and again)
So it is in no way correct to characterise fractional reserve lending as lending out more than what it has received in deposits. If it doesn't get that money circulating back to it in the form of further deposits then it can't continue to lend it out. fractional reserve lending can be more correctly characterised as lending out less than it has received in deposits, because that's what actually happens (and even shit wikipedia articles explaining it make this point in the examples they use)
firstly every post of mine towards Jazz has been on the topic of the thread, I haven't mentioned anti-semitism once. purely because i wanted to show that jazz was wrong, not because he has displayed strong anti-semitic sympathies on other threads, but because he was wrong on the topic of this thread
secondly, bank's don't create money out of 'nothing' - so the statement is untrue
the sphere of circulation itself facilitates the circulation of money such that the effective supply of money is increased as a result of this - bank's may be a necessary part in that whole process (although i could argue that they are not) but they certainly are not the sufficient part - and it is this which makes the statement 'banks created money out of nothing' untrue. It's not 'banks' that do it and it's not out of 'nothing' either - so the statement is untrue on two different levels
Bernie Gunther
Fundamentalist Druid
There's a point in that process you described though, the one I quoted, where fictitious capital is created.
The point where loans made against real things, property in this case, is packaged up and turned into securities, whose future value then becomes the subject of speculation.
I understand that this is not at all the same thing as "money created out of nothing" but perhaps is sometimes being confused with it (or in phildwyer's case I suspect, deliberately conflated with it for rhetorical purposes) and is potentially a more fruitful topic of discussion.
The point where loans made against real things, property in this case, is packaged up and turned into securities, whose future value then becomes the subject of speculation.
I understand that this is not at all the same thing as "money created out of nothing" but perhaps is sometimes being confused with it (or in phildwyer's case I suspect, deliberately conflated with it for rhetorical purposes) and is potentially a more fruitful topic of discussion.
love detective
there's no love too small
fictitious capital, in marx's sense, is much wider, and in a sense more basic, than that though (although what you say above is still correct)
take equity shares in a company that owns productive assets - the title to those shares circulates independently and their price can be impacted by things which are nothing to do with the underlying value represented by the productive assets that the shares give ownership over (i.e. interest rate fluctuations can change the net present value of the future income stream of those assets , speculation etc..) - this at its most basic marxian form - is fictitious capital, but it manifests itself in all kind of other ways as well, but at essence its the same simple concept
the capital itself doesn't exist twice, once in the form of the shares and once in the form of the productive assets that the shares give partial ownership over - but those titles start to move and behave as if independent of the underlying things that they represent
so yes you're correct that this isn't the same as 'money created out of nothing' because once again there is clearly something here - despite the disconnect and unhinging of the titles to capital from the actual capital itself
take equity shares in a company that owns productive assets - the title to those shares circulates independently and their price can be impacted by things which are nothing to do with the underlying value represented by the productive assets that the shares give ownership over (i.e. interest rate fluctuations can change the net present value of the future income stream of those assets , speculation etc..) - this at its most basic marxian form - is fictitious capital, but it manifests itself in all kind of other ways as well, but at essence its the same simple concept
the capital itself doesn't exist twice, once in the form of the shares and once in the form of the productive assets that the shares give partial ownership over - but those titles start to move and behave as if independent of the underlying things that they represent
so yes you're correct that this isn't the same as 'money created out of nothing' because once again there is clearly something here - despite the disconnect and unhinging of the titles to capital from the actual capital itself
Bernie Gunther
Fundamentalist Druid
Sure but where I was going with this was ...
Put that way, one can perhaps understand this present crisis as an attempt by finance capital to hold the rest of us to ransom on behalf of the investors holding title to big chunks of fictitious capital created by speculation against dodgy derivatives and such.
The gun held our heads being the "actual stoppage" which Marx mentions in the passage above.
It seems as though the pundits and politicians want us to believe that such disruption would be a) utterly inevitable and b) closely involve all four horsemen of the Apocalypse.
Is that actually the case though? It might be inevitable while all electable parties are wholly in the pocket of finance capital, but that hardly makes it a law of nature does it?
http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm
Put that way, one can perhaps understand this present crisis as an attempt by finance capital to hold the rest of us to ransom on behalf of the investors holding title to big chunks of fictitious capital created by speculation against dodgy derivatives and such.
The gun held our heads being the "actual stoppage" which Marx mentions in the passage above.
It seems as though the pundits and politicians want us to believe that such disruption would be a) utterly inevitable and b) closely involve all four horsemen of the Apocalypse.
Is that actually the case though? It might be inevitable while all electable parties are wholly in the pocket of finance capital, but that hardly makes it a law of nature does it?
love detective
there's no love too small
this is at the very heart of the disconnect between money & value - but the topic of value is always notable by its absence amongst folk like jazz
and one big difference between marx's time and now is that his fictitious capital (other than things like state debt) actually had some linkage to productive assets, i.e. the railways, canals that he mentions etc. where as now the fictitious capital has went to the nth level, with a large element of it based upon nothing but future promises (which is the same as what the fictitious capital of state debt is). The danger in this discussion however is that Jazz will be along in a minute to misunderstand it and announce he's been right all along - the key thing here however is that a bank can't magic these future promises into existence from nothing, they are still the dependent actor in all this and they still have to fund the lending that is made on the basis of these future promises to repay (i.e. sub prime lending etc..). So nothing has changed with regard to that
i would say an understanding of the crisis has more to do about the squeezing out of profitable opportunities for capital in the traditional productive spheres (profit rate decline due to increasing productivity etc..) so a tendency/movement developed within capital that attempted to detach itself from its 'material' basis (which is value production) and just skip out the production of value altogther and focus on capturing a bigger and bigger slice of previously created value within the sphere of circulation itself. In the mistaken belief that somehow value could not only be captured, but actually produced purely by shifting things around in the sphere of circulation (if only Capital the process/relation could read Capital the book then it would have realised that it can't do that, although even if it did know it couldn't do it, it would be powerless to stop itself trying, such are the contradictions inherent within it)
This was always going to end how it did, as capital may be able to stretch away from it's 'material' base (i.e. value production) for a certain amount of time, but it never can truly decouple and detach itself from the thing that gives it its very life blood (the production of value by appropriated labour) - so like a big unbreakable elastic band, value relations reassert themselves eventually and snap the whole thing back in, destroying the multiple layers of fictitious capital that had been built up in is wake - and crisis did what crisis does - irrationally rationalise an irrational system, so the whole thing can start over again
and one big difference between marx's time and now is that his fictitious capital (other than things like state debt) actually had some linkage to productive assets, i.e. the railways, canals that he mentions etc. where as now the fictitious capital has went to the nth level, with a large element of it based upon nothing but future promises (which is the same as what the fictitious capital of state debt is). The danger in this discussion however is that Jazz will be along in a minute to misunderstand it and announce he's been right all along - the key thing here however is that a bank can't magic these future promises into existence from nothing, they are still the dependent actor in all this and they still have to fund the lending that is made on the basis of these future promises to repay (i.e. sub prime lending etc..). So nothing has changed with regard to that
i would say an understanding of the crisis has more to do about the squeezing out of profitable opportunities for capital in the traditional productive spheres (profit rate decline due to increasing productivity etc..) so a tendency/movement developed within capital that attempted to detach itself from its 'material' basis (which is value production) and just skip out the production of value altogther and focus on capturing a bigger and bigger slice of previously created value within the sphere of circulation itself. In the mistaken belief that somehow value could not only be captured, but actually produced purely by shifting things around in the sphere of circulation (if only Capital the process/relation could read Capital the book then it would have realised that it can't do that, although even if it did know it couldn't do it, it would be powerless to stop itself trying, such are the contradictions inherent within it)
This was always going to end how it did, as capital may be able to stretch away from it's 'material' base (i.e. value production) for a certain amount of time, but it never can truly decouple and detach itself from the thing that gives it its very life blood (the production of value by appropriated labour) - so like a big unbreakable elastic band, value relations reassert themselves eventually and snap the whole thing back in, destroying the multiple layers of fictitious capital that had been built up in is wake - and crisis did what crisis does - irrationally rationalise an irrational system, so the whole thing can start over again
Ok, I'm not denying for a moment most of what you are saying, but let's look , again, at Wikipedia's standard Commerce "O" level" type example of a (single bank in a VERY simplified model) bank increasing the money supply from one "£1000" deposit:
Example
As a simple example of how the fractional reserve system works, consider a scenario of only one bank, a reserve fraction of 10%, and an initial money supply of $1000 cash that is initially deposited at our bank. This can effectively be turned into $9954 through 50 successive loans and redeposits. This is achieved as follows. Only 10% of the original $1000 is required to be held as reserve for the deposit, and so the remaining $900 can be loaned out to a customer who will most likely exchange it with another person for some goods or services. That person will most likely in turn redeposit it in another account within our bank. As only 10% of this new deposit must be held in reserve, the remaining $810 may then be loaned out again and subsequently redeposited, and so on and so forth. If we end the series after 50 iterations, we find that we have $9954 now in existence within the money supply.
The bank , ie Finance Capital, is not an accidental or replaceable actor in this process (assuming for simpified model purposes that the state isn't directly allocating resources in some "Command Economy" model). Banks are not just passive gateways or conduits , enabling money to flow in the "sphere of circulation", as you appear to suggest. In the simplified model example the bank is both "responding to" the existing need for cash expressed by its customers seeking loans, based on existing levels of economic activity, but also, it is a "leading promoter" timewise , in bringing about new , additional , economic activity, through its provision of new loans, beyond the initial total value of money deposited in its vaults. This is partly why capitalism is such a dynamic, constantly expanding system - the ability to expand the money supply because of Fractional Reserve Banking pulls/encourages new resources and economic activity into being though the capitalist market mechanism. If new, additional, economic activity isn't "encouraged/promoted" into being via the issuing of new loans, then the additional money created is , very crudely, chasing a relatively smaller volume of goods - so prices rise, and we get inflation -- and on a grand scale, hyperinflation.
So there is, as a simplified model, a critical "time lag" issue here - the bank (or the whole of finance capital) constantly creates new money , from "nothing" - other than the mechanism of "Fractional Reserve Banking" to lend out more than the bank has received as deposits, partly, AHEAD timewise of the new, additional, production of goods and services that extra money eventually generates though capitalist production. However you cut it, viewed from this angle, banks DO constantly "create money from nothing". The "Commerce "O" level position isn't the full picture by a huge degree, which you have well explained, but it isn't "wrong" either I would suggest.
butchersapron
Bring back hanging
A bank is not finance capital in the marxist sense that you're using - as a a marxist.
discokermit
Well-Known Member
what the fuck has his job got to do with anything, you sanctimonious twat?
he's not a bully. nor does he look like one.
I'll take your word for that - Nevertheless my simple model its an attempt to argue just one point, that increases in the money supply by banks derived from the Fractional Reserve Banking phenomenum can be seen as creating "money from nothing" because the ability, in the example, to lend out $9954 on the basis of an initial $1000 deposit, over future time brings new additional capitalist production into being. Because banks are not just passive conduits of money circulation but also active drivers of the expansion of the system. Without this constant production expansion Fractional Reserve Banking would quickly produce hyperinflation. but I agree with you the banks themselves create no new value, just extra money supply, (or an increase in the "velocity of circulation" of money), rather than necessarily any extra physical cash. But in doing this the banks PROVOKE additional real economic activity, and hence the creation of additional real value.
love detective
there's no love too small
two things
firstly, the bank's don't create this increase in the money supply, they play a part in it, but a part that they could not play on their own
secondly, this isn't created out of nothing, it's created from the various conditionalities that are required to be in place for it to happen
to argue that banks create money out of nothing, the person arguing it must prove that
1. the banks' role is not only necessary but, sufficient (to prove that it is the banks and not the wider sphere of circulation and all its actors that actually effects the increase in the money supply), and
2. that the bank does not need to rely on certain conditions being met and in place before they can lend (i.e. they don't have to have someone wanting to borrow, they don't need to have funding in place to make that lending etc..)
If the above two things could be proved then I would be happy to concede that banks can create money out of nothing
If the above two things could be proved however it would mean that the crisis we have been living through for the last 4 years didn't actually happen
and i'm sure it did you know
firstly, the bank's don't create this increase in the money supply, they play a part in it, but a part that they could not play on their own
secondly, this isn't created out of nothing, it's created from the various conditionalities that are required to be in place for it to happen
to argue that banks create money out of nothing, the person arguing it must prove that
1. the banks' role is not only necessary but, sufficient (to prove that it is the banks and not the wider sphere of circulation and all its actors that actually effects the increase in the money supply), and
2. that the bank does not need to rely on certain conditions being met and in place before they can lend (i.e. they don't have to have someone wanting to borrow, they don't need to have funding in place to make that lending etc..)
If the above two things could be proved then I would be happy to concede that banks can create money out of nothing
If the above two things could be proved however it would mean that the crisis we have been living through for the last 4 years didn't actually happen
and i'm sure it did you know
butchersapron
Bring back hanging
You need to only mod threads that you know anything about. You have just literally said that you will ignore criticisms of posters that you personally know and like - and worse, you'll don your mods hat to defend them on threads you haven't and will not read.
Meltingpot
Living in our pools we soon forget about the sea
IMO, all any mod has to do to keep this place flowing properly is to curb and / or rein in the insults, which come thick and fast in this section of the board in particular (and I know you're not one of the worst offenders). You don't have to have read the Grundrisse to be able to do that.
butchersapron
Bring back hanging
Exactly, it's a 19 page thread on a board that you're modding and one that you've intervened in.
You seem determined to shift effortlessly from the fact that if banks can and routinely do, create an inverted , larger, pyramid of loans , "new money" , based on the deposits they receive, to the proposition that, therefore banks can create an unlimited amount of "new money" at will, with a real relevance to real production in the real world. Who actually thinks this ? Noone. Who thinks the banks actually do "on their own" create the broad set of necessary conditions for an increase in money supply to either, increase economic activity, OR, fail to increase economic activity - and hence merely have an inflationery effect ? Not me anyway. But that still doesn't invalidate the standard economic view that Fractional Reserve Banking creates (OK, as part of the greater whole, the "wider sphere of circulation") "new money".
I can't help but conclude that this entire debate is based on two different interpretations of the words "from nothing" being adhered to by the two camps - and there seems no way to bridge that differing view as to what "from nothing" implies.
As an ancient olde ex-teacher of "A" level Economics, My advice to anyone looking at this debate, who is doing any sort of GCE or any other Commerce or Economics exam soon, is to stick to the standard view on Fractional Reserve Banking, and the creation of "new money" , as I earlier reproduced from Wikipedia.
From Wikipedia:
Fractional-reserve banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the central bank) that are equal to only a fraction of the amounts of customers' deposits. Funds deposited at a bank are mostly lent out; the bank keeps only a fraction (called the reserve ratio) of those funds as assets or "reserves". Some of the funds lent out are subsequently deposited with another bank, increasing the fund assets and deposit liabilities at that second bank, and allowing further lending. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, by the excess reserves kept by commercial banks, and by the publicly held currency not deposited in banks.[1][2]
If you put down what love detective has argued... you'll simply get a FAIL. And by that I don't mean he's "wrong" ....just ascribing a particular "qualifying requirement" to the concept of "from nothing" which is unnecessarily complex, and distracts from the basics of simple money supply increase enabled through Fractional Reserve Banking.
cesare
shady's dreams ♥
And my own "advice to anyone looking at this debate, who is doing any sort of GCE or any other Commerce or Economics exam soon" is not to quote Wikipedia in any kind of debate because you leave yourself open to pointing and laughing from people who are all too well aware of the limitations of this self-editable source; which have, on occasion, been used to great comic effect.
love detective
there's no love too small
so far on this thread we've had malthus only being wrong because he was wrong and now me being wrong because i'm right (inverting articul8's usual 'i was right to be wrong' to a 'you were wrong to be right)
so in summary, if you want to get a pass in a GCE exam pay attention to wikipedia whereas if you actually want to understand what's going on around you in the world.....
so in summary, if you want to get a pass in a GCE exam pay attention to wikipedia whereas if you actually want to understand what's going on around you in the world.....
BigTom
Well-Known Member
Having done GCSE, A-level and the first year of an economics degree, I have to say that GCSE and A-level's were much more connected to reality than the degree (Which I dropped out of cos it was such bullshit).
One thing I want to ask about from this conversation is about how much money a bank can lend out given a deposit from a saver.
The wiki entry is I think saying is that if a saver puts in £1000 (and for the maths simplicity have an FRB requirement of 10%) then the bank can lend out £900 of that. I thought that deregulation had changed this, and some clever fool had reasoned thusly:
If by keeping a reserve of £100, I can lend out £900, then by keeping a reserve of £1000, I can lend out £9000. So if someone deposits £1000, this means I can lend out £9000, not £900.
But as far as I know, that £9000 would need to be actually funded, through inter-bank loans or from hedge funds etc.
This change in regulation, allowing banks to borrow like that, led to banks lending out far more than they had in deposits from savers - which would fit with the NR scenario that LD layed out earlier, iirc £2bn withdrawals from savers dwarfed by £30bn interbank lending. - and may also lead to some of the confusion here?
Meltingpot
Living in our pools we soon forget about the sea
Out of interest, what was the bullshit you encountered in tour first year of uni? I know squiff-all about economics so I'm not going to comment one way or the other.
BigTom
Well-Known Member
It is all the rational choice theory based econometrics stuff (which was everything that was taught).
Basically the assumptions they make are so far away from the real world that any conclusions they draw are neccesarily wrong... for instance, they assume that everyone is a rational, utility maximising consumer who has perfect knowledge (ie: knows all of the sellers in the marketplace and what price they sell at, and have equal access to all the sellers) and makes choices based purely on a cost-benefit analysis of price.
So stuff like the effect of advertising, the fact that no-one has perfect knowledge or is completely rational are totally ignored. There's no real interest in talking to psychologists about how people actually behave, because they have their assumption and all theories are built from that.
Then there are things they say that stem from the above, like every economic transaction that takes place is a positive sum gain and maximises the utility for both actors, on the basis that a rational consumer will only take part in a transaction that maximises their utility and so whatever takes place must maximise the utility for both parties, or they'd do something else with their money/product/time.
This extends for instance to employment whereby they think if I take poverty line wages because it's all that is on offer that somehow maximises utility for both me (because my only other option is to starve, clearly worse) and the employer (who gets to pay me fuck all). Completely ignores power relationships and the obvious factor that in the real world people make choices that they are effectively forced to make, not freely.
This then leads to the (logical, given the axioms) conclusion that in order to make the world the best place possible we should make sure there are as many transactions taking place as we can, since every transaction maximises utility. Usually this means taking away regulations. Total ignorance of how power relationships work.
Another example of this kind of thing is "perfect competition" which is something that cannot take place in the real world because of the conditions that are required for it - no barriers to entry for new businesses for instance, impossible, you can make barriers small but never take them away completely, every business needs some start up capital either in the form of cash or time at the very least. Also says that there are enough buyers and sellers in the market place that no-one has the power to set prices like in a monopoly, and that all buyers and sellers have perfect knowledge.
Now as an intellectual exercise thinking about different types of market that is fine, but for some reason they seem to think that perfect competition could actually exist, mostly if it wasn;'t for that damn government placing regulations on business (never mind that business tends towards cartels & monopolies when you look at the actual real world, because the theory of competition means that it should go towards perfect competition, even if it never quite gets there).
Should say that the above stuff does not constitute "economics", it's just one paradigm of economics - but it's totally dominant, especially in the realm of public policy.
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